Government loaning NBN $20 billion to finish roll-out

NBN Co has abandoned plans to borrow money from debt markets to complete the roll-out and will instead borrow $19.5 billion from the federal government "on commercial terms". This takes total government contributions to the project to nearly $50 billion.

NBN will be borrowing at approximately 3.71 per cent interest, better than most commercial home loans.

The government expects NBN Co to repay the loan by 2021, when the rollout is finished, by borrowing money on external markets.

NBN chief executive Bill Morrow released a statement on Friday morning confirming the government, not debt markets, would fund the rest of the roll out.

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Bill Morrow says consumers need to be more aware of what speeds are available. Credit:Daniel Munoz

"NBN has been advised the government will loan the remaining $19.5 billion required for the total $49 billion base case peak funding forecast. This allows the NBN executive to fully focus on building and operating the network, to bring fast broadband to all Australians by 2020," Mr Morrow said.

"NBN welcomes the decision which is in the best interest of the Australian taxpayer. With security of funding in place, we are focused on the job at hand of building the network and providing fast broadband access and universal connectivity to all Australians by 2020."

The company's 2017 Corporate Plan assumed it would use private debt to fund the rest of the roll out. However, Fairfax Media reported in August the government changed the requirement for the network to be built "within the constraints of a public equity capital limit of $29.5 billion". The loan will commence in 2017-18 and be repaid in full within four years. The 2021 repayment date gives NBN Co time to complete its roll-out and present commercial lenders a fuller revenue picture.

The two shareholder Ministers - Communications Minister Senator Mitch Fifield and Finance Minister Mathias Cormann - said the government "has decided to provide the remaining funding required to complete the rollout through a government loan to NBN Co Ltd on commercial terms".

"In anticipation of a future privatisation of NBN as provided for in the NBN Companies Act 2011, it is expected that this loan will be re-financed by NBN on external markets in 2020-21. A Government loan on commercial terms represents the most cost effective way to raise the debt and secure funding to complete the rollout of this important national infrastructure project."

NBN Co had been working with credit agencies Moody's and Standard and Poor's to get its own credit rating. Earlier this month Mr Morrow said the government-owned company was "pleasantly surprised" with its rating, but would not reveal the rating.

"Commonwealth's commercial loan terms will be set in line with the credit ratings achieved by NBN," the Ministers' statement noted.

Senator Cormann told BusinessDay: "NBN will pay interest to the government as they would if the loan had been secured on the private debt market".

"The interest rate will comprise the four year swap rate at the time the loan is entered into, currently 2.61 per cent per annum, plus a margin to reflect NBN credit rating, establishment and hedging costs (approximately an additional 1.1 per cent per annum)."

This means NBN Co will be paying approximately 3.71 per cent, leading to repayments of about $742 million per year on the full $20 billion. However, it will be drawing the loan down gradually on a monthly basis so won't borrow the full amount for some years.

The initial funding of $29.5 billion was not a loan but an investment the government expected to recoup by privatising NBN Co once the roll out had finished.

NBN Co took in $181 million in revenue in the first quarter of the current financial year. It has about 1.4 million active users and plans to have more than eight million households using its network by 2020.

Head of fixed income credit research at NAB, Michael Bush, noted another government-owned company is borrowing money from external markets.

Australia Post currently has an AA- credit rating and has a $175 million bond on issue that matures in 2023. It is trading at 125 basis points above treasury bonds in the secondary market, he said. Government five-year bonds are trading at 2.2 per cent.

However, Australia Post and NBN Co are "very different companies", with one in decline and the other ramping up, Mr Bush noted. The only similarity is they are both government owned. And anyone lending to NBN Co would take into account 'development execution risks' such as delays and cost over-runs.